Shutterfly Announces Fourth Quarter and Full Year 2016 Financial Results

New focus on four strategic areas announced, supported by 2017
restructuring

Significant increases in profitability and quality of earnings in 2017
and 2018 support reinvestment towards sustainable growth

REDWOOD CITY, Calif.--(BUSINESS WIRE)--
Shutterfly, Inc. (NASDAQ:SFLY), the leading online retailer and
manufacturer of high-quality personalized products and services, today
announced financial results for the fourth quarter ended December 31,
2016. At the same time, the Company announced a new vision built around
four strategic areas. Over the course of 2017, Shutterfly, Inc. will
restructure to focus resources on these high-potential opportunities.

GAAP operating income of $49.1 million, compared to $18.3 million in
2015.

Net income per share was $0.45, compared to a net loss per share of
$(0.02) in 2015.

"We're proud of our 2016 delivery against key initiatives, particularly
Shutterfly Business Solutions, mobile, and product range expansion, as
well as our continued progress on Operating Income, which more than
doubled year-over-year," said Christopher North, President and Chief
Executive Officer of Shutterfly. "At the same time, Consumer growth came
towards the low end of our guidance, and Adjusted EBITDA slightly below
guidance, as Shutterfly-brand growth was offset by revenue declines in
the Tiny Prints, Wedding Paper Divas, MyPublisher, and BorrowLenses
brands."

Shutterfly shared its vision for the future. The Company's Consumer
vision is to help people share life's joy by being the leading online
retailer and manufacturer of high-quality personalized products. This is
complemented by the Company's Enterprise vision of being the leading
digital manufacturing platform for business. To support this vision,
Shutterfly announced four areas of strategic focus going forward: (1)
make purchasing personalized products simple, (2) expand our range of
categories and products, (3) pivot towards mobile, and (4) leverage our
manufacturing platform.

To focus resources on these four components of the strategic plan,
Shutterfly will restructure in 2017, with the following changes
occurring over the course of the year:

Shutterfly is re-investing in Tiny Prints as its premium cards &
stationery brand, creating a Tiny Prints boutique on a dedicated tab
on Shutterfly.com later this year.

The new Shutterfly Wedding Store will be the focus of the Company's
wedding strategy, including a premium Wedding Paper Divas-branded
stationery collection.

The MyPublisher brand will be retired in favor of the industry leading
Shutterfly Photo Books category.

Current Tiny Prints, Wedding Paper Divas, and MyPublisher customers
will migrate to Shutterfly.com and the legacy websites will shut down.

Three very small businesses, TripPix and FavePix, as well as the
Shutterfly Pro Gallery service will be shut down.

Santa Clara-based teams will be consolidated into Redwood City
corporate headquarters. The Santa Clara office and both New York
locations will be closed.

Headcount will be reduced by approximately 13% or 260 employees.

The transition will happen over the course of the first three quarters
of 2017 and is expected to be complete before the holiday peak season.

BorrowLenses will undertake a strategic review for possible sale.

Going forward, Shutterfly will invest in a single Consumer platform,
with all customers benefiting from continued investment in the
Shutterfly.com site.

As a result of these changes, the Company expects to incur restructuring
charges over the course of 2017 ranging from $15 million to $20 million.

"Our vision is strongly motivated by the belief that sustainable growth
comes from innovating on behalf of customers over the long term. At the
same time, our plan strikes a balance between investing for growth and
delivering improvements in profitability. In each of 2017 and 2018, we
will deliver sequential improvements in profitability as well as quality
of earnings, while funding re-investment in the business to drive growth
in 2019 and beyond," North concluded.

During 2016, the Company repurchased approximately 2.5 million shares
for $112.5 million, at an average price of $44.55 under its share
repurchase program. As of December 31, 2016, $82.8 million remained
authorized under the repurchase program.

[1]Total capital expenditures of $75.6 million
excludes $9.8 million related to printers that were acquired and
immediately sold in the second quarter of 2016.

[2]Adjusted EBITDA minus capital expenditures was
referred to as "free cash flow" prior to the fourth quarter of 2016.

"In an effort to provide a view into the full benefits of the changes we
are making, we are providing high level thoughts for 2018, our first
full year operating after the restructuring. For 2018, we are targeting
an increase to total net revenues of approximately $70.0 million driven
by continued growth in SBS of approximately 20% and mid-single digit
growth in Consumer. We are targeting an increase to GAAP gross profit of
approximately $40.0 million and an increase to both Adjusted EBITDA and
GAAP Operating Income of approximately $50.0 million. We are targeting
capital expenditures to remain flat at approximately $75.0 million. No
restructuring charges are expected in 2018, " said Mike Pope, Chief
Financial Officer of Shutterfly.

[3]Excludes restructuring charges ranging from $15
million to $20 million as well as any costs related to refinancing our
convertibledebt.

[4]In 2017, net revenues from SBS segment to
increase 20% over 2016.

Notes to the Fourth Quarter 2016 Financial Results and Operating
Metrics and 2017 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines
as earnings before interest, taxes, depreciation, amortization and
stock-based compensation.

Adjusted EBITDA minus capital expenditures is a non-GAAP financial
measure that the Company defines as adjusted EBITDA less purchases of
property, plant, and equipment and capitalization of software
development costs. This measure was referred to as "free cash flow"
prior to the fourth quarter of 2016.

Consumer segment includes net revenues from stationery and greeting
cards, photo books, calendars and photo-based merchandise, photo prints,
and the related shipping revenues and rental revenue. Consumer also
includes net revenues from advertising and sponsorship programs.

Shutterfly Business Solutions (SBS) includes net revenues primarily from
variable, four-color direct marketing collateral manufactured and
fulfilled for business customers.

Average Order Value (AOV) is defined as total net revenues (excluding
SBS) divided by total orders.

The foregoing financial guidance replaces any of the Company's
previously issued financial guidance which should no longer be relied
upon.

Fourth Quarter Conference Call

Management will review the fourth quarter 2016 financial results and its
expectations for the first quarter and full year 2017 on a conference
call on Wednesday, February 1, 2017 at 2:00 p.m. Pacific Time (5:00 p.m.
Eastern Time). To listen to the call and view the accompanying slides,
please visit http://www.shutterflyinc.com.
In the Investor Relations area, click on the link provided for the
webcast, or dial (888) 317-6003 or (412) 317-6061, and enter the
conference access code 9725499. The webcast will be archived and
available at http://www.shutterflyinc.com
in the investor relations section. A replay of the conference call will
be available through Wednesday, February 15, 2017. To hear the replay,
please dial (877) 344-7529 or (412) 317-0088, and enter access code
10098795.

Non-GAAP Financial Information

This press release contains non-GAAP financial measures. Tables are
provided at the end of this press release that reconcile the non-GAAP
financial measures that the Company uses to the most directly comparable
financial measures prepared in accordance with Generally Accepted
Accounting Principles (GAAP). These non-GAAP financial measures include
non-GAAP gross profit margin, non-GAAP operating income (loss) and
operating margin, adjusted EBITDA, and adjusted EBITDA minus capital
expenditures. The method the Company uses to produce non-GAAP financial
measures is not computed according to GAAP and may differ from methods
used by other companies.

To supplement the Company's consolidated financial statements presented
on a GAAP basis, we believe that these non-GAAP measures provide useful
information about the Company's core operating results and thus are
appropriate to enhance the overall understanding of the Company's past
financial performance and its prospects for the future. These
adjustments to the Company's GAAP results are made with the intent of
providing both management and investors a more complete understanding of
the Company's underlying operational results and trends and performance.
Management uses these non-GAAP measures to evaluate the Company's
financial results, develop budgets, manage expenditures, and determine
employee compensation. The presentation of additional information is not
meant to be considered in isolation or as a substitute for or superior
to gross margins, operating income (loss), or net income (loss)
determined in accordance with GAAP. For more information, please see
Shutterfly's SEC Filings, including the most recent Form 10-K and Form
10-Q, which are available on the Securities and Exchange Commission's
Web site at www.sec.gov.

Notice Regarding Forward-Looking Statements

This media release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that
involve risks and uncertainties. These forward-looking statements
include statements regarding the Company's growth and financial
expectations for the first quarter, full year 2017 and full year 2018
set forth under the caption "Business Outlook," and statements about
historical results that may suggest trends for our business. The
Company's actual results may differ materially from those anticipated in
these forward-looking statements. Factors that might contribute to such
differences include, among others, economic downturns and the general
state of the economy; changes in consumer discretionary spending as a
result of the macroeconomic environment; the loss of sales partners for
our products; our ability to expand our customer base, increase sales to
existing customers and meet production requirements; our ability to
successfully integrate acquired businesses and assets; our ability to
retain and hire necessary employees, including seasonal personnel, and
appropriately staff our operations; the impact of seasonality on our
business; our ability to develop and implement innovative, new products
and services on a timely and cost-effective basis, including our next
generation Shutterfly platform; consumer acceptance of our products and
services; our ability to develop additional adjacent lines of
business; unforeseen changes in expense levels; and competition and
pricing strategies of our competitors, which could lead to pricing
pressure. For more information regarding the risks and uncertainties
that could cause actual results to differ materially from those
expressed or implied in these forward-looking statements, as well as
risks relating to our business in general, we refer you to the "Risk
Factors" section of the Company's most recent Form 10-K and Form 10-Q,
and the Company's other filings, which are available on the Securities
and Exchange Commission's website at www.sec.gov.
These forward-looking statements are based on current expectations and
the Company assumes no obligation to update this information.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading online retailer and manufacturer of
high-quality personalized products and services. Founded in 1999, the
Shutterfly, Inc. family of brands includes Shutterfly,
where your photos come to life in photo books, cards and gifts; Tiny
Prints, premium cards and stationery for all life's occasions; Wedding
Paper Divas, wedding invitations and stationery for every step of
the planning process; MyPublisher,
one of the pioneers in the photo book industry and creator of
easy-to-use photo book-making software; BorrowLenses,
the premier online marketplace for photographic and video equipment
rentals; and Groovebook,
an iPhone and Android
app and subscription service that prints up to 100 mobile phone photos
in a Groovebook and mails it to customers every month. For more
information about Shutterfly, Inc. (SFLY),
visit www.shutterflyinc.com.

[1] Average order value excludes Shutterfly Business
Solutions revenue.

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2016

2015

2016

2015

Consumer

Net revenues

$

521,484

$

503,331

$

997,556

$

961,418

Cost of net revenues

198,949

189,125

455,387

436,050

Gross profit

322,535

314,206

542,169

525,368

Consumer gross profit margin

61.8

%

62.4

%

54.3

%

54.6

%

Shutterfly Business Solutions (SBS)

Net revenues

39,742

44,749

136,668

98,011

Cost of net revenues

28,673

37,090

100,582

79,789

Gross profit

11,069

7,659

36,086

18,222

SBS gross profit margin

27.9

%

17.1

%

26.4

%

18.6

%

Corporate [1]

Net revenues

—

—

—

—

Cost of net revenues

2,426

2,518

10,148

12,239

Gross profit

(2,426

)

(2,518

)

(10,148

)

(12,239

)

Consolidated

Net revenues

561,226

548,080

1,134,224

1,059,429

Cost of net revenues

230,048

228,733

566,117

528,078

Gross profit

$

331,178

$

319,347

$

568,107

$

531,351

Gross profit margin

59.0

%

58.3

%

50.1

%

50.2

%

[1] Corporate category includes activities that are not
directly attributable or allocable to a specific segment. This
category consists of stock-based compensation and amortization of
intangible assets.

[1] In the second quarter of 2016, the Company acquired
and immediately sold $9.8 million of printers.

[2] Adjusted EBITDA minus capital expenditures was
referred to as "free cash flow" prior to the fourth quarter of
2016.

[3] The Company reclassified an immaterial contingent
consideration payment (to Groovebook Founders) in the first
quarter of 2016 between operating and financing activities within
the cash flow statement.